Income Tax Appellate Tribunal - Delhi
Asstt. Commissioner Of Wealth-Tax vs Allied Motors (P.) Ltd. on 15 December, 1992
Equivalent citations: [1993]45ITD566(DELHI)
ORDER
R.M. Mehta, Accountant Member
1. The following ground is raised in the Revenue's appeal directed against the order of Commissioner of Wealth-tax (Appeals):-
The CWT (Appeals) erred on facts and in law to hold that a building under construction with inadequate plant and machinery was a factory which was used by the assessee on 30-6-1983 in terms of Section 40(3)(vi) of Finance Act, 1983, even though the factory building was completed subsequently and factory went into production on 30-12-1983.
2. The respondent in this case is a Private Limited Company and the assessment year involved is 1984-85, the valuation date being 30th June 1983.
3. The Finance Act, 1983 by means of Section 40 revived the levy of wealth-tax in the case of closely held companies w.e.f. assessment year 1984-85. In other words, this is the first year of assessment after reintroduction of wealth-tax on such closely held companies.
4. The respondent, company filed a return of wealth on 22-8-1986 declaring wealth of Rs. 1,48,268. The WTO, in the course of the assessment, came across an investment of Rs. 2,34,203 in a leasehold land at Sahibabad, purchased from U.P. State Industrial Corp., date of purchase being 1-12-1977 and further expenditure incurred in connection with the said land in 1977-78, 1978-79 and 1982-83. The WTO also came across a sum of Rs. 22,45,452 spent on the construction of a factory building on the said plot of land which was incomplete on the valuation date, viz. 30-6-1983. The WTO at this stage referred to the relevant section in the Finance Act, 1983, which was Section 40(3)(vi) and which stated :
Building or land appurtenant thereto other than building or part thereof used by the assessee as factory...
According to him, the building was not being used as a factory as on the valuation date since the same was under construction. He, accordingly, subjected to wealth-tax the amount invested in the plot of land and in the construction of the factory building.
5. Being aggrieved with the order passed by the WTO, the assessee came up in appeal before the CWT (Appeals). In the course of appellate proceedings, it was contended that the interpretation placed by the WTO on the word 'used' was not correct inasmuch, as soon as the operation for establishing the unit had commenced, it could be construed that the land and building was 'used' as a factory. Attention was drawn to the legislative intent behind reintroducing the wealth-tax on closely held companies and that being to levy tax on unproductive assets and the factory building under construction not being such an asset. In support of the aforesaid arguments, reliance was placed on the decision of the Hon'ble Supreme Court in the case of CWT v. Ramaraju Surgical Cotton Mills Ltd. [1967] 63 ITR 478. The CWT (Appeals) after considering the aforesaid submissions proceeded to hold that the assessee fulfilled the conditions for exclusion laid down by the relevant provision and the addition of Rs. 24,79,655 was required to be deleted. He did so on the following lines:-
I am inclined to accept the contentions of the learned counsel. Once the asset is committed for use as factory asset, it would no longer fall under Section 40A(3)(vi). The expression 'used as factory' does not necessarily apply to active user of the asset. Even the passive user of the asset when the asset is in the process of absorption as business asset clearly fulfil the conditions for exclusion contained under Section 40(3)(vi). The Supreme Court decision in Ramaraju Surgical Cotton Mills Ltd.'s case (supra), quoted by the learned counsel, fully supports the view being taken by me here. In my opinion, the factory land and building at Sahibabad aggregating to Rs. 24,79,655 is not includible in the total wealth of the appellant since the appellant had already commenced construction of factory building for setting up the manufacturing unit at the site. The addition of Rs. 24,79,655 made by the Asstt. Commissioner is, therefore, deleted.
6. The learned Departmental Representative at the outset supported the order passed by the WTO, reiterating thereafter the reasons recorded in the said order in rejecting the view-point canvassed on behalf of the assessee. The learned counsel for the respondent, on the other hand, supported the action of the CWT (Appeals) in deleting the addition made by the WTO. It was stated that the reintroduction of Wealth-tax on closely held companies was one with a view to subject to tax unproductive assets and there was a specific exclusion of the building or land appurtenant thereto which was being used as a factory. According to him, the value of the land and the factory building under construction on the valuation date, viz. 30-6-1983 could not be classified under any other head. The learned counsel also referred to the speech of the Hon'ble Finance Minister while introducing the Finance Bill reported in 140 ITR Statutes page 32. He also placed reliance on the decision of the Hon'ble Supreme Court in Ramaraju Surgical Cotton Mills Ltd.'s case (supra).
7. After examining the rival submissions, we find no good ground to interfere with the decision taken by the CWT (Appeals) in deleting the addition.. As rightly contended by the learned counsel, the reintroduction of wealth-tax on closely held companies from the assessment year 1984-85 was done with a view to tax unproductive assets. In the assessee's case, there is no dispute on either side that the factory building is under construction as on 30-6-1983 and it has been completed only after that date since the production is supposed to have commenced on 31-12-1983. According to us, it could not be the legislative intent to allow the said exemption only when the factory building is complete and the production has commenced, since the use of the asset as a factory building becomes manifest from the date on which the construction commences. The Supreme Court was considering more or less a similar issue in Ramaraju Surgical Cotton Mills Ltd. 's case (supra) although that was with reference to the provisions of Section 5(1)(xxi) of the Wealth-tax Act, 1957, which read as follows :-
5(1)(xxi) that portion of the net wealth of a company established with the object of carrying on an industrial undertaking in India within the meaning of the Explanation to clause(d) of Section 45, as is employed by it in a new and separate unit set up after the commencement of this Act by way of substantial expansion of its undertaking ...
8. The relevant facts of that case were that the Board of Directors of the company which was formed in 1939 for the purpose of carrying on the business of manufacturing absorbent cotton wool, resolved in March 1955 to establish a new spinning unit for which the industrial licence was obtained in August 1955. The respondent, company placed orders for the necessary spinning machinery and plant in January and February 1956. The construction of buildings which began in March 1956 was completed in December 1957. The installation of the machinery and plant was completed by stages commencing from June 1957. The licence for working the factory unit was obtained from the Inspector of Factories in June 1958 and the time to complete the project was extended by the Government up to March 1959.
9. On the basis of the aforesaid facts, the assessee in its wealth-tax assessment for the assessment year 1957-58 claimed that in computing its net wealth on the valuation date, viz. 30-9-1956, the amount of Rs. 1,43,727 which was laid out in setting up the new unit should be deducted in accordance with the provisions of Section 5(1)(xxi). The WTO disallowed the assessee's claim and his order was subsequently upheld by the AAC and the Tribunal. Thereupon, at the request of the assessee, a question of law was referred for the opinion of the Hon'ble High Court of Madras and which thereafter, proceeded to uphold the view point canvassed on behalf of the assessee and allowed necessary exemption under Section 5(l)[xxi). On further appeal, filed by the department before the Supreme Court, the decision of the Madras High Court was confirmed. In doing so, their lordships of the Supreme Court observed as follows:-
The High Court held that unless a factory is erected and plants and machinery installed therein, it cannot be said to have been set up. The resolution of the Board of Directors, the orders placed for purchasing machinery, licence obtained from the Government for constructing the machinery are merely initial stages towards setting up, however necessary and essential they may be to further the achievement of the end. It is not, however, the actual functioning of the factory or its going into production that can alone be called setting up of the factory. The setting up is perhaps a stage anterior to the commencement of the factory. Thereafter, the High Court referred to a decision of the Bombay High Court in Western lndia Vegetable Products Ltd. v. CIT [1954] 26 ITR 151 and, on its basis, concluded that the proper meaning to be assigned to the expression 'set up" in Section 5(1) (xxi) would be 'ready to commence business'. We are unable to agree with the learned counsel for the Commissioner that, in arriving at this view, the High Court committed any error. A unit cannot be said to have been set up unless it is ready to discharge the function for which it is being set up. It is only when the unit has been put into such a shape that it can start functioning as a business or a manufacturing organisation that it can be said that the unit has been set up. The expression used in the proviso, under which the period for which the exemption is available is to be determined, is not the same as that used in the principal clause. In the proviso, the period of five successive years of exemption has to commence with the assessment year next following the date on which the company commences operations for the establishment of the unit. Operations for the establishment of a unit from the very nature of that expression, can only signify steps that have to be taken to establish the unit. The word 'set up' in the principal clause, in our opinion, is equivalent to the word 'established', but operations for establishment cannot be equated with the establishment of the unit itself or its setting up. Theapplicability of the proviso has, therefore, to be decided by finding out when the company commenced operations for establishment of the unit which operations must be antecedent to the actual date on which the company is held to have been set up for purposes of the principal clause. This is also the meaning that the Bombay High Court derived in the case in Western India Vegetable Products Ltd. where that court was concerned with the interpretation of the expression 'set up' as used in Section 2(11) of the Income-tax Act. That court held : 'It seems to us that the expression 'setting up', means, as is defined in the Oxford English Dictionary 'to place on foot' or 'to establish' and in contradistinction to 'commence'. The distinction is this that when a business is established and is ready to commence business then it can be said of that business that it is set up. But before it is ready to commence business, it is not set up. This view as expressed when that court was considering the difference between the meaning of the expression 'setting up a business' and 'commencing of a business'. In the case before us, the proviso does not even refer to commencement of the unit. The criterion for determining the period of exemption is based on the commencement of the operations for the establishment of the unit. These operations for establishment of the unit cannot be simultaneous with the setting up of the unit, as urged on behalf of the Commissioner, but must precede the actual setting up of the unit. In fact, it is the operations for establishment of a unit which ultimately culminate in the setting up of the unit.
On this interpretation, it is clear that in this case, the claim put forward by the respondent for exemption has been rightly held to be allowable by the High Court.
10. No doubt, the aforesaid decision of the Hon'ble Supreme Court pertains to the provisions of Section 5(1)(xxi) of the Wealth-tax Act, 1957, but necessary support can be drawn from the said decision to convince us that the order passed by the CWT (Appeals) is correct in law. The same is, accordingly, confirmed.
11. In the result, the appeal is dismissed.